Greetings, and welcome to the Americold Realty Trust Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Henderson, Senior Vice President of Capital Markets and Investor Relations.
Please go ahead, sir.
Good afternoon. We would like to thank you for joining us today for Americold Realty Trust's Q2 2019 earnings conference Call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional details on our results, which is available in the Investor section on our website at www.americold.com. On today's call, management's prepared remarks and answers to your questions may contain forward looking statements. Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
A number of factors could cause actual results to differ materially from those anticipated. Forward looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events. During this call, we will discuss certain non GAAP financial measures. More information about these non GAAP financial measures and reconciliations to the comparable GAAP financial measures is contained in the supplemental information package available on the company's website. We would also like to note that numbers presented in today's prepared remarks have been rounded to the nearest million with the exception of per share amounts.
This afternoon's conference call is hosted by Americold's Chief Executive Officer, Fred Bohler and Executive Vice President and Chief Financial Officer, Mark Smernoff. Management will make some prepared comments, after which we will open up the call to your questions. Now, I will turn the call over to Fred.
Thank you, and welcome to our Q2 2019 earnings conference call. This afternoon, I will provide highlights for the 2nd quarter and Q2 results and then discuss our balance sheet, capital markets activity and outlook. After our prepared remarks, we'll open up the call for your questions. The 2nd quarter was a strong quarter for Americold. We reported revenue growth in our Global Warehouse segment of 17.6% and NOI growth of 25.3%, which includes 2 months of results from our recent acquisitions.
On the margin side, as our platform and scale have grown, we continue to benefit from the operating efficiency gains driven by labor productivity and the leveraging of fixed expenses. Prior year to 33.7%. Finally, we are pleased with the performance of our core portfolio. On a constant currency basis, our Global Warehouse segment same store revenue grew by 3.4% and our same store segment NOI grew by 6.2%. Now I'd like to take a moment to discuss the underlying fundamentals within the Temperature Control Warehouse Industry.
We continue to see attractive supply and demand dynamics that are most favorable to owners of large fully integrated networks of temperature control warehouse space. We continue to support our more than 2,600 customers, including large global accounts in our midsize and emerging customers. We also continue to work with our retail customers as they navigate the evolving competitive landscape by enhancing and integrating their e commerce offerings. While we believe that the growth of e commerce does create opportunities for Americold, for the most part, e commerce does not add overall demand. It simply shifts the end distribution point and customer fulfillment In addition, the ongoing shift in consumer preferences towards healthy perishable food increases the demand for temperature controlled infrastructure.
We believe these fundamentals are sustainable over the long term. Diving deeper into the trends As a result, the best place for retailers to service last mile logistics, including click and pick shopping or home delivery is the store itself. This is because transportation costs are typically the most expensive part of the supply chain. So utilizing space that is closest to the end user for the full availability of their inventory within their existing stores that facilitates more efficient selection of high volume products to support e commerce. As these retailers prioritize their investments in the customer experience and maintaining low prices, Americold stands ready to provide advanced supply chain solutions and infrastructure for their temperature control needs.
On the supply side, significant barriers to entry remain in place. These include high construction costs as well as requisite operational expertise and customer relationships. Our processes are backed by many years of research and 1,000,000 of dollars of technology investment. We leverage this investment along with the expertise we have developed in house to create advanced solutions for our customers. This, coupled with the Americold operating system, drives significant competitive advantages and gives our customers confidence in our ability to maintain their brand integrity.
We believe this customer centric focus, combined with our portfolio that has the right assets in the right locations, will serve us well as we seek to achieve consistent and profitable growth over the long term. Now, I'd like to turn to our development activity where we have been making exciting progress. In Chicago, at our state of the art automated expansion project, we have completed construction and have received temporary certificates of occupancy. We are currently commissioning our automation systems and continue to inbound customers. As a reminder, we underwrite to achieve stabilization in 1 year and we believe we are well on track.
In Australia, we continue our conversation with our customers on our build to suit projects. Due to changes in the timeline, we can now update you that our spending will be pushed out by a year to 2020, with the first delivery and associated cash flow is now expected in 2022. While we expect the economics and the return profile to remain the same, we would remind you that this is a customer driven build and as such, we have to remain flexible to meet their needs. In Atlanta, we continue to make progress on our major market expansion at Tradewater and the redevelopment of our Gateway property to a state of the art automated facility. At completion, we will have significantly increased our capacity in Atlanta, where available space is limited due to strong customer demand.
Finally, in Savannah, we both ground at the end of the second quarter on our planned 15,000,000 cubic foot state of the art temperature control facility. On the transaction front, during the Q2, we completed the acquisition of Loop Cold Storage, which consisted of 22 facilities comprising 132,000,000 cubic feet and Lanier Cold Storage, which added 2 facilities and 14,000,000 cubic feet to our portfolio. These acquisitions meaningfully grew our portfolio and added size, scale, density and diversification of product and customer. Since closing, we have been focused on fully integrating these assets into our portfolio. At Cloverleaf, we have begun to realize synergies and eliminated redundant corporate SG and A.
While Mark will discuss the financial impact, I would like to note that we have already successfully integrated their 22 facilities into our USA operating structure. Further, we have implemented our commercial processes and have begun rolling out the Americold operating system across all sites. We have also transitioned our core SG and A functions, including HR, Finance and Engineering to our headquarters in Atlanta. I'm excited about our progress to date and I believe we are on track to achieve our synergy goals. With respect to the development pipeline we acquired as a part of the Cloverleaf acquisition, we have reviewed each of the 3 expansions, which are located in Chesapeake, Virginia Little Rock, Arkansas and Columbus, Ohio.
These projects, which total $51,000,000 to $57,000,000 of investment have been aligned with our Americold standards and construction continues to be on track. Turning to Lanier, we are far along with the integration of both sites. Our existing local market presence in Gainesville helped us to quickly integrate We expect to recognize the benefit of moving to the Americold operating system and engineered standards over time. Finally, before I turn the call over to Mark, I'd like to note that we recently announced the appointment of 3 new members to our Board of Trustees, Kelly Barrett, Tony Fernandez and David Nethercutt. These three individuals have skill sets that are complementary to our existing Board and we look forward to benefiting from their fresh perspective and experience.
With these additions, our Board remains at 9 members, 8 of which are independent, which we believe demonstrates our commitment to shareholder friendly corporate governance. Now, I will turn the call over to Mark.
Thank you, Fred, and good afternoon, everyone. Today, we will provide updates on our actual performance as well as certain metrics on a constant currency basis. We would also note that our portfolio results this quarter include the benefit of 2 months of ownership following the closing of the Cloverleaf and Lanier acquisitions. For the Q2 2019, we reported total revenue of $438,000,000 and total NOI of $121,000,000 which reflects an 11.1% increase and a 23.3% increase over the prior year, respectively. Core EBITDA was $94,000,000 for the Q2 of 2019, an increase of 27 0.1% year over year.
As a result, our core EBITDA margin grew by 2 69 basis points to 21 0.4%. We reported net income of $5,000,000 compared to net income of $29,000,000 for the same quarter of the prior year. Please note, our net income was impacted by several items, including costs associated with our recent acquisition activity and subsequent integration efforts to realize synergies. Also, please note that Q2 2018 net income included $8,400,000 in gains
on the sale of real estate.
Our 2nd quarter core FFO was 56,000,000 dollars or $0.30 per diluted share. This compares to $43,000,000 or 2018. Our 2nd quarter AFFO was $58,000,000 or 0 point 3 1 dollars per diluted share compared to $40,000,000 or $0.27 per diluted share in the Q2 of last year. As a reminder, the full definition and reconciliation of core EBITDA, core FFO and AFFO to reported net income can be found in our supplemental. For the Q2 2019, Global Warehouse segment revenues were 338,000,000 dollars which reflects growth of 17.6 percent year over year.
Segment NOI was $114,000,000 which reflects growth of 25.3%. Global warehouse margin was 33.7% for the Q2, a 208 basis point improvement over the same quarter of the prior year. We estimate that about 60 basis points of this margin expansion can be attributed to our recent acquisitions. At quarter end, on a dollar volume basis, 2 $32,000,000 of our rent and storage revenues were derived from customers with fixed commitment storage contracts as compared to $222,000,000 dollars in the Q1 of 2019 203,000,000 for the Q2 of 2018. On a combined pro form a basis, 38.3 percent of our rent and storage revenues standards.
Now I will turn to our same store results in the Global Warehouse segment. We define same store as facilities that have at least 24 months of normalized operation. For the Q2 2019, 138 of our 160 our Finally, we would note that our same store results this quarter reflect the timing of the Easter holiday in the Q2 of 20 19 as compared to the Q1 of 2018. Please note the number of business days was the same in the second quarter 2019 and the Q2 of 2018. In the Q3 of 2019, our results will include one additional business day compared to the prior year.
As we have said, given the seasonality of our business, we believe that our annual results are the best way to track our progress. For the Q2 of 2019, our same store Global Warehouse segment revenues were $288,000,000 which reflects growth of 1.5% year over year and 3.4% on a constant currency basis. Global same store NOI was $95,000,000 up 4.9% over the prior year results and grew by 6.2% on a constant currency basis. As a reminder, this comparison was impacted by a previously announced $1,000,000 benefit realized in the Q2 of last year for favorable workers' comp Looking ahead to the 3rd and 4th quarters, we did not recognize any one time favorable benefit last year. I will now discuss our same store results in a little more detail.
For the Q2, global same store rent storage revenues grew by 0.3% year over year or 2% on a constant currency basis. Our same store economic occupancy 76.7 percent, down 148 basis points from the prior year. Our continued transition to fixed commitment contracts partially offset a 249 basis point decline in physical occupancy. Our global same store rent and storage NOI grew by 2.4% year over year or 3.8% on a constant currency basis. This corresponding NOI growth was a result of active portfolio management combined with our efforts to grow our fixed commitment storage contract and disciplined cost controls through the Americold operating system.
Global same store warehouse service revenue for the 2nd quarter increased 2.4% year over year or 4.5% on a constant currency basis. This increase resulted from the volume associated with the Easter holiday combined with a favorable mix, which resulted in a 3.7% growth in our same store warehouse services revenue per throughput pallet. This more than offset the 1.2% lower throughput pallet volume associated with this mix. Our same store warehouse services NOI was 13,000,000 dollars an increase of $3,000,000 or 24.7 percent for the quarter. Warehouse services NOI margin increased 141 basis points to 7.9% in the quarter due to our favorable customer mix and improvements through the Americold operating system.
Please note that adjusting for our workers' comp benefit realized in the Q2 2018, our same store warehouse services NOI growth would have been 38.7% on a constant currency basis. Using the same store pool for the first half of the year, which represents 137 facilities and normalizes for the impact of the Easter holiday, our revenue growth was 3.1% and NOI growth was 3.9 percent on a constant currency basis. Adjusting for the $2,000,000 workers' comp benefit received in the first half of twenty eighteen, our NOI growth would have been 5.1%. This is consistent with our expectations for the year. Within our Global Warehouse segment, we had no material changes to the compositions of our top 25 customers who on a pro form a basis account for 60% of our global warehouse revenue and who have been with us on average for over 30 years.
Additionally, our churn rate was approximately 4% of total warehouse revenue, a 100 basis point increase over the same period last year. Our active portfolio management and our continued emphasis on shifting to fixed storage commitments have contributed to the slight increase. Corporate SG and A totaled $33,000,000 for the Q2 of 2019 as compared to $28,000,000 for the comparable prior year quarter. This increase is primarily a result of the SG and A absorbed with the acquisitions of Cloverleaf and Lanier, increased stock compensation expense and additional investments made to support our expanded development pipeline. Additionally, we incurred total cost of $18,000,000 for the Q2 as shown on the acquisitions litigation and other line within our statement of operations, which primarily reflects M and A advisory fees and integration related severance.
Now let me update you on our development and acquisition spending during the Q2 for the projects Fred outlined to you. In aggregate, we spent $77,000,000 year to date on expansion and development capital. In Chicago, our total estimated cost and stabilized returns remain consistent with our prior stated range. As Fred mentioned, we have completed construction and we are in final commissioning phases of the automation system. We expect to achieve stabilization within the next 12 months.
In Atlanta, we began construction during the Q2 and spending totaled $3,000,000 In Savannah, we broke ground at the quarter end and second quarter spending was not meaningful. And finally, with respect to the 3 in process expansion projects we added as part of the Cloverleaf acquisition, 2nd quarter out of an anticipated total spend of $51,000,000 to 57,000,000 dollars This includes $9,000,000 spent prior to our ownership. Turning now to our balance sheet markets activity. On May 1, we closed the acquisition of Cloverleaf Cold Storage for a purchase price of 1,250,000,000 dollars This translates to an approximate 7% NOI entry yield, which is exclusive of SG and A expense. The transaction was accretive day 1 on the leverage neutral basis and we are currently working to realize synergies.
Of the $10,000,000 in total cost savings that expect to realize, we have already eliminated approximately $4,000,000 on an annualized basis, mainly consisting of duplicative corporate expenses. Further, we have taken actions to eliminate an additional $5,000,000 corporate costs and $1,000,000 of operational expense in the warehouse segment, both on an annualized basis. Please keep in mind that of these total synergies, our original expectation was to capture a run rate of $8,000,000 in the 1st 12 months after closing. We are on track to meet or exceed this target. Additionally, on May 1, we acquired Lanier Cold Storage for $83,000,000 which translates to an approximate 7.9 percent NOI entry yield, again, exclusive of SG and A expense.
As Fred mentioned, we are making progress on integration as expected. As of June 30, 2019, our total portfolio consisted of 170 8 mission critical facilities. Of these, 166 are in the warehouse segment and 12 are managed and our total 50,310,000 shares in a follow on offering including the exercise of the underwriters option at 29.7 $5 per share. The 50,310,000 shares were inclusive of a forward contract for 8 point 25,000,000 shares to be settled within 1 year. We utilized the net proceeds, which totaled 1,200,000,000 to the forward offering to fund our acquisition and development activity.
Also in May, we closed on the private placement of $350,000,000 of senior unsecured notes, which bear interest at a rate of 4.1 percent with an initial duration of 10.7 years. We use the fund as long term debt financing for the Cloverleaf Lanier acquisition. As of June 30, 2019, we had total liquidity of 1,500,000,000 dollars This includes $138,000,000 $236,000,000 of net proceeds from our September 2018 and April 2019 equity forwards respectively. Our total debt outstanding was $1,900,000,000 of which 75% was in an Our real estate debt is a weighted average term of 6.9 years and carries a weighted average contractual interest rate of 4.49%. Subsequent to the quarter end, we extended our forward contract from September 2018 by 12 months with a new settlement date of no later than September 2020.
We made this decision in light of our recent capital markets activity, which provides us with adequate liquidity for our near term funding needs. Before I turn the call back to Fred, we'd like to update you on our outlook for the remainder of 2019. We are reiterating our Global Warehouse segment same store revenue growth range of between 2% to 4%, and we continue to expect same store NOI growth to range between 100 to 200 basis points higher than the associated revenue growth, both on a constant currency basis. SG and A expense as a percentage of total revenue is expected to range between 7% resources for our development pipeline. We expect to be able to leverage these expenses over time as our developments and the associated revenues come online and as we realize synergies from our recent acquisitions.
Recurring maintenance and IT capital expenditures are expected to be within the range of $56,000,000 to $66,000,000 which reflects the addition of Cloverleaf and Lanier portfolios. Development capital expenditures are expected to be $220,000,000 $250,000,000 This includes spending related to the company's announced projects in Chicago, Savannah, Atlanta, our land purchase in Sydney as well as 3 expansions associated with Cloverleaf, which also reflects the shift of our anticipated spending in Australia being pushed out an which reflects a full year weighted average diluted share count of 180,000,000 to 184,000,000 shares. This no longer includes our 6,000,000 share equity forward issued in September 2018, which has a new settlement date of no later than
with our results year to date. It's never easy to integrate a business, but our team is up to the challenge. We truly appreciate the hard work from each member of our legacy and newly expanded team. We are excited to bring these acquisitions into our platform and the direction we are headed as a company. As we continue through the second half of the year and beyond, we believe Americold is uniquely positioned to drive long term growth and create shareholder value.
We will continue to leverage our portfolio, operations, talent and technology to profitably serve all of our customers and their mission critical temperature controlled supply chain needs. Thanks again for joining us today and we will now open the call for your questions. Operator?
Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Hey, everyone. Good afternoon. Fred, I appreciate your remarks on e commerce sort of maybe not impacting your business very much, but there are certainly businesses out there that are trying to bring all grocery deliveries sort of delivered fresh to you or fresh to the consumer. Are you just saying that you think that those businesses are going to end up relying on the supermarkets? Or you just don't think that they're big enough at the distribution level to sort of change things in your business very much?
Well, I think when you look at hey Manny, sorry about that. When you look at the supply chain overall, really when you think about e commerce, e commerce is another distribution method. So, it's not incremental consumption that's going to happen in the marketplace. So, product is still going to be made by the manufacturers and move through our production advantage facilities. It's then going to be moved closer to the markets in our major logistics corridors.
And then it gets moved on, in this case, going to e commerce, most of those some of the smaller e commerce providers are fed by local distributors. So we ship it to the distributor and then the distributor would service those local e commerce providers. So, we think that there'll be a little bit of a shift as e commerce continues to penetrate the marketplace, but we don't think it's a monumental shift in terms of overall demand and consumption. We also believe that for the broader United States, where the density isn't as massive as it is in, say, Manhattan, for example, that a lot of the real estate that's already in existence, I. E, the store itself, will become a better platform to be able to service e commerce.
So, you hear about micro fulfillment centers, for example, companies like Takeoff and their technology. There's 4 major grocers in the United States today that are doing tests with that. And what that is, is it's automation that's literally in the back end of a grocery store. So they're moving the walls out, shrinking the store itself, expanding the back room and putting efficient automation in the back room to be able to select its highest SKUs. So they're only going to handle 10,000 SKUs in the automation, whereas the store has 45,000 SKUs.
So the slower moving product, they'll still select from the store itself and then marry that up with the automation. So just in aggregate, yes, I believe that there's a shift. Yes, I believe that e commerce is going to continue to grow. I'm just a little bit more cautious on the amount of demand that it's going to bring and to overall volume.
Thanks, Fred. And for Mark, on guidance, your payout ratio went down. I think you tied that to the lower share count from the delayed forward offering. Wouldn't that impact both sides of the equation? So how much of that is just math and how much of it is your AFFO or expected AFFO is actually just going up?
So a number of things. The revised payout ratio really is driving both of those. So as we said from our initial guidance, we mentioned that we expected the acquisitions to be immediately accretive. And then also the fact that we're reducing the denominator due to extending the forwards, they're both having impact to the overall yield targets for the year.
Great. Thanks, Vincent.
Thanks, Danny.
Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.
Yes, thanks. Fred, the company has been active acquiring assets obviously in the second quarter, but since Americold and Lineage owned about 55% of the domestic market, should we expect that the company is going to pursue more tuck in deals as opposed to the larger portfolios like the Cloverleaf deal going forward?
Well, I think that's just a function of
what's out there and available, if
you will. There's very few companies that are the size and scale of Cloverleaf, right? I think Cloverleaf, when we acquired them, was number 5. So there's very few companies of that size, if you recall. If you look at the top 10 players the marketplace here in the U.
S, if I just focus on the U. S, I think number 10 on that list has 2 or 3 assets. So it's just a very, very steep drop off. So you can kind of take with that what you can read out of it. There probably are lesser opportunities of big acquisitions, more tuck in.
Okay. And then how are
you thinking about the European market or other international markets? Does it make sense to pursue a larger platform transaction abroad, especially given the recent activity we've seen in your cost of capital?
Yes. We continue to explore around what we would call good, stable countries that we believe add benefit to our overall portfolio. We continue to explore those opportunities. And if we find the right situation, we will do that. But one thing that we will continue to remain true to is our acquisition strategy and kind of the deliberate aspect of finding companies that complement our portfolio and that we believe can be fully integrated into our way of doing business.
Okay. And then I guess lastly for me, I know that you guys still have a pretty healthy shadow development pipeline. I mean, is it still around $1,000,000,000 And if so, do you expect that you can break ground on more projects in the second half of this year? Or would you prefer to just kind of advance the in process pipeline to date?
Yes. I mean, it's possible that we could break ground later this year. The pipeline is still healthy. It is still over $1,000,000,000 We do have 7 active projects going on right now between expansions and kind of finishing facilities and new shuttles that just went on the ground. So we're pretty busy right now, but things are heating up with some other opportunities and we'll see how the timing works.
Okay, great. Thank you.
Thanks, Michael.
Your next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your
Let's go back to the e commerce topic. Let's just say e commerce, grocery e commerce grows to 10%. And for argument's sake, let's assume half of that is fulfilled through micro performance centers at the grocery store like with Takeoff or Common Sense Robotics and the other half is done through the more warehouse network. So how Amazon does it or how Ocado and Kroger plan to do it. How does Americold position itself to take advantage of that?
Or does it make or does it not make a big impact
to you? It's not a huge impact. I mean, let me explain kind of the supply chain. So, if it's micro fulfillment centers, it follows the exact same supply chain path that we have in place today, right? So that micro fulfillment center is not treated any different than a store would be, okay?
So from a flow standpoint, from an asset utilization standpoint, it's really no different. What I would say is that we're working with our retail customers that are doing those tests There might be some additional services that we can provide in our DCs to help make the goods more prepared for that automation in advance of sending it to the store. In other words, doing decanting, getting rid of all the corrugates so that it doesn't have to flow to the store type of thing, right? So, those are additional services that we can do in our operations. If it's a standalone type of operation like an Ocado, it's yet to be seen exactly how that will work because they can take 1 of 2 paths.
Either number 1, it's coming out of our distribution centers and we're shipping product directly to Ocado or we continue the path of shipping to a Kroger DC and then a Kroger DC in turn sends product to the Ocado DC. So we see Ocado, that technology, which is fantastic technology, we see it doing more than fulfilling e commerce at least in the beginning. There's a lot of product in the grocery store that is slow moving, that doesn't need full case replenishment, such that it happens today. So what happens is a lot of grocers have extra supply, a lot of working capital tied up in stores of some of these slow moving products. So I can see Kroger and others that get involved in this technology leveraging that each pick efficiency and allowing that operation to actually backfill stores in each.
Has the idea of being a capital partner for those build outs, how realistic is that?
Yes. No, that's potential. I would remind you though that the Ocado, even the micro fulfillment centers, still the percentage that's temperature control is still a minor percentage, right, less than 20%. And it's still yet to be seen whether or not these technologies are even going to operate in the frozen and the deep freeze to support ice cream, for example. So, they'll have to look at those volumes and see how that goes to see whether or not the investment in the technology within the temperature control area makes sense or whether they handle it as a one off type of pick.
So I think it's still early to be seen.
Okay. And just last question, if I may. Just going back to your underlying business trends, it's good to see your operating metrics go back into higher growth mode. But with that said, the only kind of flying ointment is the occupancy continues to be down year over year, whether that be physical pallet positions or economic occupancy. So I just want to understand what's going on in the underlying business.
Is it how does your customer retention rate look like? And the customers that are there, are they using more services or not? And when should we see the year over year declines in occupancy, economic occupancy start to peter up or bottom up?
Yes. So again, it's this function between physical occupancy and economic occupancy is one of the big contributors because remember, we're not overselling space. So when customers as our economic occupancy continues to be on the rise, which it is, as a percentage of our overall dollars in storage and rent. As that continues to go up, it's less space for me to physically sell into. So hence, less opportunity to drive that physical occupancy.
The other thing to remember is we continue to guide to looking at
at an annual basis.
And the ebbs and flows of volume from our manufacturers and from our retailers is not something that we can directly control. Sometimes there's initiatives associated with cutting back on working capital, which might mitigate the volume going through a facility or the space at any one point in time. The harvest cycles, which have less impact on dollars, as you can see, but have an impact on physical occupancy. We had an operation that used to be leased out, which would account it as 100 occupancy. And we're moving that tenant out and
we're going to repurpose that facility for a
real nice customer that's coming on board. But those things just tend to ebb and flow.
Yes. Ki Bin, if I can jump in and add, I'd say as the management through our active portfolio management, what we're really focused on is how do we drive core wall cash flow. That's the highest priority of our business. So while the other metrics we report them, they're very important and we do pay attention to them. What we focus on is how do we drive the most cash flows out of our network.
And I'm going to prioritize driving cash flow over driving an occupancy metric or a throughput metric, right? So, and as you see, I think the portfolio performance is performing consistent with our guidance for you.
Year. Yes. And I think you asked the question about retention rate. Again, we haven't lost any material customers. Our churn rate is pretty much consistent and that's just under 4% or right around 4%, I think for this particular quarter.
It kind of hovers around that 3% to 4% type of range. And that's just what I'll call normal type of churn. Customers that either are bought or customers that go out of business or customers that we portfolio manage. There's a variety of reasons for that churn, but it's still pretty low churn overall.
All right. Thank you for that.
Sure. Thanks, Ki
Bin. Your next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Yes. Good afternoon, Fred and Mark. And I guess, notwithstanding your recent comment, Mark, just about driving forward wall cash flow, I can go back to the economic occupancy and physical occupancy. When we think about it from the Q1, you had said Easter really drove a lot of that activity, the throughput volume into the Q2. But in the Q2, we really didn't see the year over year pickup that you would have expected to see with the holiday shift.
So, and you mentioned maybe emptying out a facility. Can you quantify some of the impacts that you're seeing in the numbers that might be one time in nature that are driving the lower occupancy, both economic and physical?
Yes. I want to make sure
we're not overstating the impact of Easter. Easter, the volume push was in the second quarter. So and bear in mind, I think and so if you think about it, Easter, I think was April 20 or right around there. The push would have had to have the product in the stores a week prior. So we're talking about a 2 week push.
So that occupancy isn't going to impact the average on the quarter. Overall though, if you look at our same store revenue grew on a constant currency basis at 3.4%, which for this industry, for overall growth, especially is significant growth. And if you think about that extrapolated over a long term, we're very consistent with kind of our long term guidance. And the reason why we also focus and we said this in our prepared remarks is to encourage people to look at a full year is because a lot of the things Fred mentioned in his prior comments with seasonality of product and different strategies of different customers or retailers in any given time that can move the underlying holdings or throughput of volume. Our job is to make sure that we can manage that and turn it into more cash flow, which I think you saw with our performance this quarter, we were able to show and do.
And then maybe on the margin expansion for the year, it looked like and just doing the quick math, I think it was if you adjusted for the $1,000,000 of expenses last year, the credit last year, maybe expenses were up 1.3% normalized. Is that something that you can continue to drive? And how much of that risk with just kind of the labor shortages and things that you're seeing out there? Can you hold that level of expense growth?
Yes. No, we definitely our overall guidance implies that we will get margin expansion because obviously we're outpacing our NOI growth by roughly 100 basis points, 200 basis points relative to top line revenue growth. So we've delivered that through the first half of the year and we expect to deliver that and that's why we reiterated guidance in our prepared remarks.
Lastly, Fred, is there any chance with the Australian development deals from the customer that those don't happen? And can you go a little bit more into color on kind of what the delay might be there?
Yes, it's just they're complex operations. This is the retailer's entire supply chain for the temperature control area. So when you get into detailed design, just different things come up, different criteria come up. You get into negotiations of commercialization and all the legal work that needs to get done, it just takes time. So we've gone through a number of iterations.
We still are very, very bullish on this. It's just a slide in timing. I think we pointed to even a less complex operation like the facility that we built that came up last October, the Ocean Spray Cranberry warehouse in Middleborough, Massachusetts, that facility is pretty straightforward, no level of high sophistication in it on unracked building dealing with totes of cranberries. That building was pushed an entire year, right? I mean, it's it's just timing of working with the customer.
It's a little bit more complex, but we're still very bullish and progressing nicely with them. So we do anticipate it continuing to happen. And the push out that Mark did was really just to align the capital with the needs.
Got you. Thank you, guys.
Your next question comes from the line of Nate Crossett with Berenberg. Please proceed with your question.
Hi, thanks guys. Maybe you can just remind us on your guideposts for leverage. I mean, you're currently below peers and given the potential for more M and A, I'm just curious how you think about the leverage here? And then on the M and A front, are there certain markets in the U. S.
That you're not in that you want to have a bigger presence or maybe you can just add a little bit more color on potential M and A?
Yes. I'll take the first half and I'll hand off to Fred to take the second half. So what we've tried to be is very thoughtful about managing the balance sheet. As Fred mentioned, we have several large active development projects going on in addition to the project in Australia ramping up next year. So we've been very thoughtful about how we've tried to manage the balance sheet to make sure that we have adequate liquidity to not only support those projects, but also to continue to support the business and other opportunities with other customers and other opportunities or M and A deal.
So we're obviously very comfortable with our leverage position and our liquidity profile. We would expect as we continue to deploy capital that leverage would slightly tick up because we're going to deploy that capital in advance of the cash flows coming online. But once those cash flows come back online, they'll help to obviously delever back down. I think on the M
and A front, it's really less about going after specific markets. It's more about how do we complement our business and deepen our penetration with our key customers and being able to fulfill their supply chain needs. So with 155 assets in the U. S, we're pretty much in all the markets that we need to be. It's about just continuing to gain market share and penetration with our customers.
Okay. That's helpful. And then on the same store labor cost increase year over year, it sounded like most of that was a 2Q 2018 comp issue. I was just curious, are there any other labor costs like our labor costs going up in the last 3 months or has it been relatively consistent?
Yes. The labor environment, I think, that we've been facing has been very consistent quarter to quarter and probably year to year. If you do look at that labor line, you got to look at it in relation also to the warehouse services line because they tend to be highly correlated.
So the more services, the more labor, right? It kind of flexes with that. But yes, no issues there in terms of our access to labor and labor costs themselves. We continue to work on initiatives to drive efficiency and scale, and that's why we're able to outpace our top line growth with NOI.
Yes. And I think you saw that we achieved conversion, especially in the services segment in terms of how we expanded our margin in that segment.
Okay. What about just general build costs like year to date? Have those meaningfully increased? And I mean, I think you've maintained kind of your yield guidance on developments, but are there any pressures on like build costs?
So I think what we see on build costs, construction costs are high are higher. We've seen year over year, both the price of steel and also the cost of automation as a number of our automation projects. There's high demand for automation, not only from the temperature control industries, but from broad warehousing industries in general. So we have seen those. Those are have been reflected into our pricing and our discussions with what we've underwritten.
So we're still comfortable that we can deliver what we've discussed in terms of return targets for our projects. Yes. I think that's the you hit
the nail on the head is whatever those costs are, we build that into our pricing. So we're always capable of maintaining our margin expectations.
Okay. That's all I got. Thanks, guys.
Thank you.
Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
One more try on the occupancy issue. As we think about your same store guidance for the second half of the year, the revenue guidance and the NOI guidance, Is that is there an implicit gain in same store year over year occupancy in the second half of the year?
There is a seasonal gain. If you look to the occupancy chart in our supplement, you'll see there is a seasonal build that impacts both physical occupancy every going into 3rd Q4. We don't expect this year to be any different than prior years. With that, as you said, there are different mixes, there are different things. But I think what we're showing through our active portfolio management is that the team is doing a good job of converting the business that we do have and the opportunities that we are winning to stronger cash flows and NOI growth.
Okay. So seasonal build, but not necessarily same store year over year build?
Well, the same store will experience the seasonal build. And so it's just as our economic occupancy continues to take hold during those times when the warehouses are not full,
we will have less physical occupancy opportunity, if that makes sense. So I would expect that
trend to continue. Again, that allows us to be more efficient in our operations, blocks up, guarantees that space for our customers and creates the demand that we can use in our development cycles as well. So
yes. Okay. All right. Two more quick questions. I think I know the answer to this one, but you're not seeing any benefit or detriment from the trade situation, right?
That's not really impacting your business at all?
Yes. We're not really seeing that on our side.
Yes, not yet. We're obviously monitoring and paying attention, but we have not seen any material impact to the business yet.
Yes. And finally for me, gosh, I don't know whether it was a month ago or so, CBRE came out with a study saying that the U. S. Needed, I think it was 100,000,000 additional square feet of temperature controlled storage over the next 5 years. I'm just curious where that would come from?
We aren't seeing any spec development still, right?
That is correct. We honestly don't know.
Yes. Look, I think as you saw with Fred's prepared remarks, we think the bigger drivers overall are going to be population growth and the trend towards healthier products that typically require a level of temperature control. We continue to see many of the large historically kind of vertically integrated in source retailers outgrow their existing temperature control needs. Often that infrastructure has been built decades ago. So we continue to see attractive opportunities for us to grow and deploy capital and support our customers.
But what we'd say is the bigger driver of the overall macro will continue to be overall population growth.
Yes. And the trend towards healthier food and stuff. So we'll see a little bit of a pickup there. I just don't see a massive ramp in space need. I see a nice steady increase of space needs over the next several years.
Speaking of healthier foods, maybe if you said that Beyond Meat was a big customer, your stock would go up.
Beyond Meat is a big customer.
There you go.
We do 100% of all their temperature control needs today.
All right. Very good. Thanks for the time, guys. Appreciate it.
Your next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Yes. Hi. Just a quick one on, I guess, development and expansion returns. Looking at the sup and looking at all the projects that are underway, they all have a generic 10% to 15% target return level on them. And I was just wondering, can you kind of walk through some of the factors that ultimately are going to decide whether a project hits a 10% or 15% stabilized return?
Yes. I mean, look, we evaluate risk associated with less complex operations that don't have a lot of labor, for example, might be on the lower end, more complex operations might be on the higher end. It's really a function of the customer set that we're trying to solve for, and it just varies.
So, yes.
Got it. And when you kick one of these off, I mean, do you have a general sense it's going to be a little bit more toward the 10% or the 15% I'm just sitting there just trying to figure out if we look at it, should we be thinking of a certain facility type is going to generally end up with a higher return or lower return? Just trying to whittle that $10,000,000 to $15,000,000 a little
more.
Yes. You can't really do it by facility type. There's just so many other factors that get involved in that. And then in a major market, for example, we have a target based on who we expect to bring in there, but who actually shows up and how much volume can mix that out a little bit different. But when we do our underwriting, we have a tighter targeted range,
if you will, that we're executing to. And just remember what we're quoting here is kind of the year typically year 2, which is our 1st year stabilized return and it tends to improve from there as we dial in the operations.
Got it. Okay. That was it. Thank you.
All right. Great. Thanks, Mike.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks.
Great. Well, thanks everyone for joining us for our call. Again, we continue to be very bullish on this business and how it's performing, very consistent with what we've stated. Hopefully, you're seeing that in the year to date results and you can look at that for the full year as we continue to execute on our plan, consistency of delivery on our acquisitions. Our integration on our acquisitions is going as planned.
So we're very excited to welcome the 3 new companies that joined us. That's going very, very well. Our conversations with our customers through that integration as well as some other efforts continue to be strong and favorable and the macroeconomic trends continue to be able to support our business model. So we're very excited about the business model and our ability to remain consistent with what we said we're going to do. So thank you all for joining us.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.